Hans Hoogervorst’s China Speech

Tom Selling’s latest on Accounting Onion is about Hans Hoogervorst, leader of the International Accounting Standards Board (the organization responsible for IFRS). “The Hans Hoogervorst IFRS Sales Pitch Hits the Road.” Selling’s post further cements his reputation as the premier commentator on financial reporting and accounting standard setting politics.

I do not like Hans. Hans is a career politician. As such, we should remember the typical politician’s propensity to be willing to say anything at any time to further his agenda.

Until just less than three years ago, he knew little more than “transparency is good,” and “global accounting standards are a must.”

Now, Hans is travelling the world, trying to get all countries to unconditionally accept IFRS. He has made recent speeches about a United States switchover. Hans, why not start with Europe? Europe uses a customized version of IFRS. The reason, of course, is that to Hans, it matters not what accounting rules are in place as long as they are branded IFRS. During a recent speech in China, Hans admitted that he decided he wanted to chair the IASB before he became interested in accounting for accounting’s sake: “These experiences triggered a personal interest in accounting … my desire to lead the IASB as it adapts to become the global accounting standard-setter.”

Selling says it well:

For a standards setter, Hans Hoogervorst, the new IASB chairman, doesn’t know much about accounting. By his own frank admission, he wasn’t even very interested in the subject until after the financial crisis hit in 2008, and he seems almost proud to disavow a command of the details of IFRS.

Consequently, his role on the IASB is obvious: to sell IFRS to as many countries as possible. Why anyone should expect someone with his background to do that with any sort of credibility is beyond me, but his selection seems to reflect a conscious strategy on the part of the IFRS Foundation: to promote the sizzle instead of the steak.

Recently, Hans has turned his attention to China, asking it to unconditionally adopt IFRS. During his speech, Hans said,

[W]hile Chinese GAAP is not word-for-word IFRSs, I understand that analysis by the Chinese regulator shows that for companies with dual listings in Shanghai (using Chinese GAAP) and Hong Kong (using IFRSs) the average difference in reported profit is 0.6%. The difference in term of net assets is even as smaller as around 0.2%.

Hans, that companies can report the same results under Chinese GAAP and IFRS is not an argument for why the country should switch to IFRS (Selling agrees). Actually, that there is little difference in reported financial results is a condemnation of both sets of accounting standards. IFRS is notorious for allowing corporate flexibility in reporting results. Chinese GAAP is much less exacting than IFRS. It is entirely reasonable to expect that a company can look at financial recordings and be able to paint the sky any color it wants, either chartreuse or polka dotted. Application of general accounting rules depends upon assumptions, and assumptions depend upon intention. If a company wants to paint the sky a particular color, it can do so under either IFRS or Chinese GAAP. The paintings will be similar because it is only one corporate painter.